Live-Blogging the Hearings for Obama’s SEC Chairman Pick

By Heidi N. Moore

Mary Schapiro, President Barack Obama’s vaguely controversial pick to head the Securities and Exchange Commission, is appearing on the Dodd & Shelby Show today (otherwise known as the U.S. Senate Committee on Banking, Housing and Urban Affairs, of which Connecticut Democrat Chris Dodd is the chairman and Alabama Republican Richard Shelby is the ranking member.) Dodd and Shelby really know how to run a hearing; their quizzing of Big Three auto executives was as good as a movie.

10:10: Dodd starts with a no-nonsense speech; the tone of his voice indicates he is ready to attack. He starts with the expected villains: “Investment banks that contributed mightily to our country’s problems have now become bank holding companies.” So that’s taken care of. He notes, “It is time to find a tough cop for the Wall Street beat — someone who will restore confidence not just in the integrity of the markets but in its regulators.”

10:14: Shelby jumps in. He praises Schapiro for her experience but notes in the same breath the SEC’s failures, including “the complete collapse of an entire industry of regulated industries….Likewise, the SEC’s regulation of the ratings agencies contributed…to the subprime crisis.” And, what does the SEC have to say for itself on missing the Madoff fraud? Shelby raises the specter of the SEC’s banishment or merging it with the Federal Trade Commission. He calls the current situation “the most significant financial reform project since 1932.”

10:15: Harry Reid “commends” Schapiro “with enthusiasm.” He argues that her regulatory experience will help SEC morale, which has been hurt because budgets are low and the “handcuffing of abilities” to enforce. Purely coincidentally, the two people behind him in the audience are looking at him with open skepticism.

10:22: Charles Schumer of New York talks about the “radical laissez-faire ideology of recent regulators.” Investment banks (again) are blames for their risk-taking, the credit derivatives market is raked over the coals for “mushrooming,” and the rating agencies’ business models are the equivalent of “students paying for their grades.” He wants greater resources for the SEC. Schumer says, “The only way the SEC is going to catch crooks is by actively looking for them.” He goes one, “With all due parochialism, this needs to be in New York.” Good idea. The SEC can just hang out in the Wall Street-area Starbucks and wait to overhear some discussion of insider trading plots. He says it doesn’t make sense for the SEC and regulators to be based in Washington when everyone they’re regulating is in New York.

10:26: Schumer is having none of this “international regulation” nonsense and rails against the “power grab by the European Commission.”

10:27: Schumer points out it will be tough. Implied: So good luck with that, Mary Schapiro.

10:28: Sen. Menendez says, “The SEC has broken down and it’s not clear whether it needs more gas or a whole new engine.” Nice metaphor. You know who would know? The Big Three auto executives. Get them back here. “Our current financial crisis is due in no small part to the failure of the SEC…the SEC is supposed to be the cop on the beat, but it seems to have been off-duty for the past couple of years.” He wants Schapiro to promise to “take no prisoners and question everything about the industry and the way the government regulates it.”

10:32: Sen. Bennett pours some cool water on the heated rhetoric. The speeches make it sound as if “all our nation’s economic problems are at the doorstep of Mary Schapiro. That’s not true,” he says. The SEC is not to blame for everything.

10:34: Dodd asks Schapiro to introduce the people behind her, who he says are either her family or “securities industry geniuses.” Schapiro introduces her two daughters and husband. Dodd, very much in the spirit of tough regulation, immediately narcs on them: “so you’re missing school while you’re here? The longer the hearing goes on, the more school you miss?” Schapiro reveals smilingly that “there is a certain math test that is being missed.” This is interesting and somewhat revealing because the Senators want to make sure that Schapiro won’t let banks and companies miss their math tests. Lax regulation starts at home?

10:35: Schapiro, having learned well from the hedge funders who appealed to Congress through their humble roots, starts with her Main Street cred: “I grew up in New York, a short train ride from Manhattan but miles away from Wall Street.” Deal Journal, who also grew up in New York, notes that what Schapiro says is both socioeconomically and geographically true. Her parents were a printer and a librarian.

10:35 to 10:38: Schapiro agrees that times are tough. “Americans want us to update the regulatory system that has failed them…I assure you that I will always keep their concerns front and center….I am under no illusion that this will be an easy job…but I look forward to the challenge.”
10:40: Dodd starts with Madoff. What does Schapiro have to say about it?

10:42: Schapiro points out the tragedy of the “stovepipe” nature of regulation that allowed Madoff’s investment advisory activities to be inconsistently regulated with Madoff’s trading activities. She gets a shot in on behalf of her agency: “FINRA didn’t have access to tips and no tips were shared with FINRA by the SEC.”

10:44: Schapiro wants to centralize all tips so they are funneled to a “senior point of contact,” then staffed and pursued by the agency. She says “there can be no sacred cows…we have to go with full force against anyone who violates investors’ trust, large or small.”

10:46: Dodd asks Schapiro to be the Committee’s spy on the use of TARP funds.

10:47: Schapiro wants credit-rating agencies, just “not broken ones, ones that give us bad information.” She advocates an overhaul of the compensation model. She recommends that exchanges pool a pot of money to pay for ratings for companies. Another solution would be to have a regulatory body aggregate the fees paid by companies, so that the companies are not directly paying for their ratings.

10:50: Banks don’t trust each other, Shelby notes, citing Bank of America’s need for more Treasury funds to buy Merrill. Shelby inhabits the voice of Jimmy Stewart for a second: “Trust used to mean something. It used to. I used to see small banks that bought securities. They’re not buying anything now. They’re scared. They’re solvent but small.” He notes that the ratings agencies are not just giving their opinions; those opinions mean something, and are trusted. “And today, they are meaning less and less.”

10:52: Shelby takes a swipe at Eric Dinallo, the New York State Insurance Commissioner, without mentioning him by name. “Look at AIG. They were regulated by the New York Insurance Commissioner. Can anyone say that the New York Insurance Commissioner knew anything about the risks they were taking on?”

10:53: Schapiro says all systemically important products and financial systems need to come under the regulatory umbrella, with no gaps. That includes everything from credit default swaps to exchanges. She says that whether that happens under the umbrella of the SEC or through a restructured, larger agency, it needs to be figured out.

10:56: Schapiro wants credit-default swaps to be traded and regulated through a clearinghouse that could be easily overseen by the SEC.

10:56: Schapiro says it is disingenuous for ratings agencies to say that their reports are just one opinion of many, because their purpose is written into federal rules. She suggests that it is wrong for issuers to pay for their ratings –”it looks like things are for sale in the markets,” Shelby suggests, and Schapiro agrees.

11:02: Schapiro says she wants to take the “handcuffs” off the enforcement division. She does not explain much, but indicates that the enforcement division is hobbled by certain processes. This sounds interesting. We wish they would explain more.

11:04: The Senators ask her about risk assessment. Schapiro is for it. Shocking! It is becoming clear that these are pretty softball hearings and the Senators are not pushing Schapiro very hard. Her answers are pleasant, but vague.

11:05: Schapiro complains about international accounting standards, or IFRS, which she estimates will cost $30 million per company to switch to. She complains that IFRS standards are less exact than GAAP, and much more open to interpretation. That is the point, though. Foreign countries prefer more principles-based accounting rules, which provide guidance but don’t create a specific set of rules that may encourage people to search for loopholes.

11:06 to 11:13 Throat-clearing on the matter of Madoff.

11:13: Schapiro says regulators on the state, federal and self-regulatory level need to get over their jealousy and competition and cooperate. So Schapiro says she found out about Madoff when everybody else did. Sympathetic eyes from the Senators.

11:17: Sen. Warner, clearly some kind of Senate confirmation-hearing radical, pushes for actual specifics on how this “broad-based” regulation would work. Then he says some very fancy things about credit-default swaps that include jargon like “tranches,” and “pricing,” and “bright-line prohibitions on these tools.” The purpose of this is to show he has done his homework. It works.

11:19: Schapiro says she has a two-fold approach: Systemic protection and investor conduct protection. The systemic part means she will encourage an evaluation of credit products in the context of their potential risk to the financial system in the time of the downturn. The investor part seems to boil down to just putting yourself in the investor’s shoes “across the panoply of products.”

11:21: Sen. Bob Corker, the scourge of Chrysler, is up next. He immediately verbally high-fives Warner for knowing his stuff. See, we knew that his mentioning “tranches” would dazzle people. We do it all the time ourselves.

11:23: Schapiro says that the SEC had an inadequate toolbox. She wants to evaluate anew every SEC-regulated entity: investment banks, investment advisers, and so on.

11:24: Corker observes that regulators can often react to a problem after it occurs — “catching up,” says Schapiro in her soft voice — and that can create a problem.

11:24: Corker brings up short-selling. If this doesn’t get interesting now that Bob Corker is discussing a controversial issue like short-selling, we give up. Schapiro says she would be willing to reinstate the “uptick rule,” a long-beloved Wall Street regulation that prevented short-sellers from selling more shares after a stock falls. The law required the short-sellers to wait for an uptick in the stock before selling more shares. For what it’s worth, Chris Cox lashed out recently that he regretted the short-selling ban.

11:28: Corker asks how Schapiro will incentivize the SEC staff. Schapiro acknowledges the “revolving door,” and says that she will do something about prohibitions about moving from the private sector into the public sector and vice versa.

11:29: Dodd notes that Congress discuss those prohibitions every four years and it may finally be time to do something about it. He asks his colleagues to wrap up.

11:30: Sen. Menendez, a Senate confirmation-hearing radical along the lines of Sen. Warner, actually pushes Schapiro on whether she has the temperament for the job. He says she is qualified, but fears that she is the “predictable and safe nominee,” and may be too easy on Wall Street firms, as per today’s WSJ front-page article. He says that FINRA was known for bringing small cases against small firms, which will not help. He wants the SEC to be the “the robust cop on the beat.” “Are you really ready and willing — able is not a question — ready and willing to take on” the problems in the market, he asks Schapiro.
11:33: Finally we’re getting somewhere. Schapiro’s voice takes on a firmer tone than the tired-sounding whisper she has been using thus far. “You can ignite real passion in enforcement lawyers by giving them the tools and the resources to battle the fraud,” she argues, pointing out that she started her career as an enforcement lawyer. She says that the WSJ article “presented a completely unfair picture” of her enforcement history. She points out that at FINRA she has taken action against Morgan Stanley, Merrill Lynch, Citigroup, CSFB and Ameriprise. FINRA took a look at variable-annuity products, IPO abuse, late trading, market timing, insider trading, and the sale of some securities, she argues. “I hope the WSJ piece doesn’t color your impression too much of me because I can be as aggressive an enforcer as anybody can be at the SEC.” Menendez says he will support her nomination and hold her to the promise of being a robust cop on the beat.

11:38: The tough questions are over, but Schapiro, alert now, keeps her firm tone. She advocates for more investor literacy on mutual funds, the bond market and how it works, and other investment products. She wants this to be on the SEC Web site and disseminated through an army of reps in SEC branch offices. Senator Akaka of Hawaii, who asked the question, gushes about what Schapiro has done thus far. He is really over the moon.

11:42: Dodd suggests a “financial products regulatory commission.” He gets a little nihilist and despairs that Congress spends all these time making financial rules, but then minutes later, “there’s a very bright 22-year-old who’s figured out six ways of getting around the rule, with the best intentions.” Them’s the breaks.

11:43: Dodd wraps up and tells Schapiro’s daughters that “the chairman of the Senate banking committee said you can have the rest of the day off.” He pauses, then for good measure throws in, “and extra credit!” Oy. Let’s hope Congress never has to regulate any pre-teens, people.

Comments (5 of 16)

America by the people and for the people has long been forgotten as money dictates poicy over and over again. I can personally say that at my age I will never be able to make back the money I had invested for retirement as I will not live long enough even if I lived too be 115 years old. Let the SEC support the common loser of this fiasco and put a tarp fund for all who can show losses from the labsence of the up-tick rule. Take the financial lobbyists out of congress and let the people have some form of compensation instead of the big banks and hadge funds.

9:20 am January 21, 2009

Bill Watson wrote :

The most important stimulus for economic recovery in our country will occur, if we, and the world, can trust our financial community.

I have grave concern over President Obama's selection of Mary Schapiro to head the SEC, because investors fared so poorly while she headed FINRA.

United States Citizens have trillions of dollars of federal funds at risk trying to restore faith in our financial markets.

We need a strong advocate for taxpayers and investors to head the SEC, or our efforts and tax monies will be in peril.

Please Mr. President, make the SEC selection based on finding a tough bulldog with a strong resume for protecting taxpayers and investors.

The inauguration parties were fitting celebrations, but now it's time to do your President stuff, the destiny of the United States is in your hands.

Mary Schapiro to head the SEC is a mistake, please correct it, ask her to withdraw.

8:38 am January 19, 2009

Ed wrote :

Thanks to David Einhorn for yelling 'Fire' in a crowded theater and causing this crash.
Thanks to the SEC for jackshit.
Schapiro? Doubtful.
Naked shorting? Priceless.
Goodbye America...

10:44 pm January 16, 2009

Rich wrote :

Am I right in saying that Meridith Whitney made her name after the uptick rule was rescinded? Is it possible that this person was being fed information (her mentor) for her to use to favor illegal short selling? Would it be right to say she is a mouthpiece for the shorts and that she is prostituting her position to make money for the hedge funds and shorts? I think this may be the case. She is nothing more than a Hedge Hore. My god who needs Bin Laden when you have this person terrorizing the countries markets!

1:22 pm January 16, 2009

@Steve wrote :

You're right, same old crap. Schapiro is in the cabal; she won't regulate it with respect to naked shorting or anything even remotely individual-investor oriented.

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